Introduction into Commodities

Commodities is a broad term used in the investment/trading community to refer to raw materials and produce such as cattle, beans, coffee, gold, grains and corn. Commodities differ from stocks in that the commodity price fluctuates when the market rate for the product goes up or down while the share price of a stock changes based on how a company manages its business. For example, a commodity investor might profit if gold prices soar while someone holding a gold stock may simultaneously lose their investment if the gold mining company goes on strike or has increasingly high overhead.

How can you trade a commodity? The producer of a commodity sells a contract in the open market. The buyer of this contract agrees to receive the goods if holds the agreement on the settlement date. However, the contract holder may have no intention of buying a large contract of the commodity. He might believe that prices will increase for the produce and he can sell it for a profit to the next party. If the commodity prices go against him – he will either be forced to sell the contract at a loss or hold the contract until settlement date and have the herd of cattle or bushels of corn brought to his home.

Commodity trading can be risky as a drought or bumper crop can affect prices in one direction or the other with high volatility.